It was absolute chaos in the currency market at the start of the first full trading week of the new year, with EUR/USD hitting fresh 9 year lows as it dropped more than 100 points in the first five minutes of trade before finally stabilizing for the rest of the day. The EUR/USD broke the psychologically important 1.2000 level and continued to fall in near vacuum conditions as stop losses and panic took over the market.

Although there was no specific news to cause the sharp selloff, some market analysts speculated that reports over the weekend that Germany may be preparing for Greece exit from the euro, sparked fear amongst investors that the single currency may be on the verge of facing yet another existential crisis.

Greece will hold fresh Parliamentary elections with Syrzia party now leading the polls which suggests that the Greek electorate may be fed up with six years of austerity conditions imposed on the country as a result of its continued membership in the Eurozone. Syrzia has made no secret of its desire to renegotiate Greek debt seeking to have creditors forgive much of the burden which stands at more than 160% of GDP.

Germans have been vehemently opposed to any debt renegotiations and reports in this weekend’s Der Spiegel suggested that German government may be willing to let Greece exit from the monetary union. On Monday a slew of German officials quickly denied the reports, but also made it abundantly clear that they expect Greece to honor its austerity obligations.

The Greek election therefore is setting up as the first key test of the EUR/USD in 2015. The underlying fact is that Greece cannot under even the most optimistic scenarios extract itself from the onerous sovereign debt burden it now faces without either significant currency depreciation or debt forgiveness. The key question is just how flexible all parties will be once the voting booths have closed and deal making begins. If Germany remains intransigent and Greece does indeed spin out of the union the repercussions could be monumental, not because of any major economic impact, but rather because it could provide the political catalyst for the exit of Italy and thus trigger much bigger problem for the European monetary union as a whole.

Today’s price action was a mere preview of the kind of volatility that is to come if the markets begin to fear the dissolution of the euro. For now the pair has settled above the 1.1900 level as liquidity has slowly returned to the market, but it remains very vulnerable to fresh bouts of selling as markets continue to worry not only about the weak economic conditions in the Eurozone but also about the political durability of the union.